The cost of higher education is skyrocketing, and governments are to blame.
President Joe Biden on Wednesday forgave $7.7 billion in student loan debt, bringing the total amount forgiven during his presidency to $167 billion. 4.75 million student loans were forgiven, representing 10% of all student loan borrowers. But this measure ignores the root of the problem: Why do so many students have such large amounts of loan debt in the first place?
Between 1980 and 2016, the cost of college rose eight times faster than wages. What was once a significant expense has ballooned into a strain on budgets. In a world of increasing innovation and efficiency, why has a college education become more expensive? As is often the case, the culprit is government overreach.
Government agencies have been pumping money into colleges and universities for years in the form of federal student aid and loan subsidies. With steadily increasing annual funding, higher education institutions have less incentive to operate efficiently. Many institutions have absorbed large portions of financial aid without lowering tuition, and have collected the surplus rather than distributing it all to students, creating a dangerous moral hazard.
This problem is exacerbated by an educational accreditation system that imposes unfairly high barriers to entry for new institutions. Without the threat of competition, existing schools can continue to raise prices without having to remain competitive in the market. If higher education were driven purely by market forces, efficiency would grow as competitors lowered costs. But without outside pressure, productivity stagnates, damaging the economic futures of young students.
Moreover, many schools are not using these surplus funds to improve the quality of education. The percentage of total expenditures spent on instruction fell 4% from 2010 to 2021. But administrative costs remain high. At the average private, nonprofit school, including most top universities, administrative costs exceed instructional costs.
Compounding this problem are the rising costs of tuition at top institutions. In 2000, tuition at Columbia University was $24,000. By 2024, that figure will be $68,000. While the best schools should be the most expensive, these institutions also receive significant government funding. Some of this is redistributed to students, but the continued rise in tuition makes the impact negligible. While $20,000 in government financial aid seems generous, when tuition exceeds aid by three times, students find themselves drowning in debt.
Lack of competition has led to stagnation in the American education system. This is due to the protectionism surrounding higher education, which has prevented new and innovative educational models from emerging. For decades, the federal government has loomed as a dictator over higher education, piling up mountains of regulation and creating prohibitive barriers to entry for start-ups while existing institutions struggle to comply. Universities build up bureaucracies to comply with government red tape, and students and families pay the price in increased costs.
This problem is exacerbated by the government's loose student loan structure, which lends billions of dollars each year to borrowers who have little ability to repay. 18-year-olds are trapped in tens of thousands of dollars of debt and expected to repay only based on future earnings growth. This expectation doesn't hold true in reality, with the United States owing more than $1.7 trillion in student loan debt, more than credit card debt and auto loan debt combined.
Governments are increasing the demand for higher education through loans while undermining the efficiency of the supply of higher education through anticompetitive regulations. The natural consequence of these actions is rising tuition fees.
The progressive dangers of intrusive government
Government intervention is a dangerous road. Giving aid to one person leads to another, and another, and another. If you start issuing soft education loans, the debt pile will grow and you'll end up in a crisis, because it's politically unpopular to cut off loans. Eventually you'll end up in a mess of government-induced inefficiency and debt.
In the case of education, the real victims of this vicious cycle are middle-aged Americans saddled with student loan debt that they have no hope of escaping. If we want to move higher education forward, the government agencies responsible for our education disaster need to take a step back and let market processes take their course.
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